The Economy of the 1920s

and the Market Crash of

1929

Introduction:

The Second Industrial Revolution

1

Learning Objectives

Explain the elements of the economic

changes of the 1920s.

Analyze the weaknesses of the American

economy of the 1920s.

Examine how weaknesses underlying the

prosperity of the 1920s led to the Stock

Market crash and the Great Depression.

2

Thematic Questions

1. Analyze the movement toward social

conservatism and the cultural conflicts over the

issues of race, religion, evolution, and

prohibition.

2. Explain the Republican administration’s policies

of isolationism, disarmament, and high-tariff

protectionism.

3. Describe the interrelatedness of international

loans, war debts, and reparations payments and

how the U.S. dealt with it.

3

The Second Industrial Revolution

The first industrial revolution took place

when steam was harnessed to run heavy

machinery.

The second took place in the 1920s when

electricity replaced steam and the modern

assembly line was introduced for the

production of consumer goods.

At this time, the U.S. developed the highest

standard of living in the world.

4

The Automobile Industry

The auto industry epitomized the changes

taking place in the economy. The car was an

expensive item, and not quickly replaced.

Auto makers relied on model changes and

advertising to stimulate demand.

The auto industry fostered the growth of

other businesses and encouraged the spread

of the suburbs farther from the inner cities.

5

Patterns of Economic Growth

Other industries also flourished in the

1920s, including electricity, light metals,

and the chemical industry.

Professional managers, who believed profit

making was compatible with social

responsibility, replaced individual

entrepreneurs.

Corporations became the dominant business

form.

6

Patterns of Economic Growth

The success of large business brought

standardization and uniformity to America,

at a cost of regional flavor.

Every town had the same A&P Grocery

Store, and the same “five and ten” store.

7

Economic Weaknesses

Although there was real economic

prosperity in the U.S. in the 1920s, there

were also disguised economic problems.

Traditional industries, like railroads and

steel, were in deep trouble, and farmers

suffered from a decline in both exports and

prices.

8

Economic Weaknesses

Laborers saw their real wages rise, but not

as rapidly as the income of middle class

managers.

The increasing income of the middle class

created its own peculiar problem.

Because the middle class had so much idle

money, much of it went into speculation.

It is not surprising that the 1920s ended in a

stock market crash.

9

The Unsound Features of

the 1920s American

Economy

10

Income

Consumers lacked sufficient income to

purchase the total output of increasingly

efficient corporations.

worker’s wages failed to keep pace with

increased productivity and prices.

The new wealth of the 1920s was largely in the

hands of a few people.

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12

Technology and Unemployment

Technological unemployment grew steadily

in the 1920s.

Machine production replaced men (hand

production)

Between two and four million worker jobs

were lost

unemployment increased.

consumer purchasing power declined.

fewer products were purchased

13

American Agriculture

American farmers did not share in the prosperity of the 1920s.

Farms became more efficient & mechanized (tractors)

Farmers went into debt

Increased efficiency and high American tariffs kept agricultural prices low.

Farmers had low incomes which resulted in lowered purchasing power.

14

America & the World

International trade declined because of protective tariffs enacted by Republican Administrations (protect the American market)

WW I hurt Europe’s economy and lessened the ability of many European countries to purchaseAmerican-made goods. (early 1920s)

As Europe’s economy revived, productivity and manufacturing increased.

The U.S. closed its market to European trade goods

15

The Problem of War Debts

U.S. loaned Allies $10 billion for armaments and reconstruction purposes.

Repayment of loans was difficult

High U.S. tariffs prevented Europeans from earning profits by selling their products in the American market.

(US buys foreign goods, $ to Allies, Allies repay loans, basically with U.S. loan money)

Debtor nations hoped to repay their loans to U.S. using German REPARATIONS payments.

U.S. viewed loans as investments; demanded repayment.

16

The Role of Bankers

American bankers made unsound loans,

both domestic and foreign.

These bank loans later resulted in bank

failures.

Bank failures wiped out the investment

capital of businesses and individual’s

savings.

17

U.S. InvestorsWALL STREET

BANKERS

SAVINGS

DEPOSITS

WALL STREET

BANKERS

MAKE

PRIVATE INVESTMENT

LOANS

GERMANY to

finance(GOVERNMENT & BUSINESSES)

FRANCEGREAT

BRITAIN

REPARATIONS

Payments

REPARATIONS

Payments

U.S. TREASURYALLIED WAR DEBT PAYMENTS

Owes G.B billions

Owes U.S. 4 billion

$ 13 billion total

18

Buying on Credit

Installment buying resulted in the over-

extension of personal debt.

Consumers stopped buying once consumer

confidence in the economy was shaken.

Historians have described the American

economy of the 1920s as a “house of cards”

or a PONZI scheme

19

The 1920s Speculative Boom

The 1920s saw a speculative boom in realestate and common stocks.

Most Americans believed the bull market would last forever.

The boom encouraged investment of savings in overpriced stocks.

Increasingly, investors bought stock on margin, where they could purchase the stock with only a small down payment and pay the balance off later (after it had increased in value)

20

21

The Stock Market Crash

of 1929

22

The Collapse of the Stock Market

By the summer of 1929, the speculative bubble was near the bursting point.

Pres. Hoover tried to curb speculation through the Federal Reserve Board (raise interest rates)

However, speculative fever caused the stock market to reach its all-time high on Sept. 3, 1929.

23

The collapse began on Monday, October 21, 1929 and was partially triggered by the British.

To gain more capital for investment, British banks raised interest rates paid on savings,

Foreign investors began selling American stocks and moving the capital to Great Britain.

The Market continued falling until Friday (10/25)

24

The Crash of 1929

Through massive buying, bankers and large investors temporarily stopped the decline in stock prices on Fri., 10/25 (stimulate demand)

When the Market opened Monday, prices kept falling.

25

“Black Tuesday” occurred on Oct. 29th

Panic selling occurred

16.5 million shares were sold (four times the normal trading volume); prices dropped dramatically; brokers called their margin accounts.

Stockholders lost $ 40 billion in paper value by January, 1930 (more than the U.S.cost of W.W. I)

26

Cause & Effect: The Great Depression

The 1920s economy

was out of balance.

Americans were

increasingly in debt.

Speculation on land

and in the stock

market was on the rise

The Stock Market

crashed in Oct. 1929

Millions of American

workers lost their jobs

as businesses reduced

production

The Nation’s Gross

National Product fell

dramatically.

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Overproduction by

increasingly efficient

businesses slowed

industrial production.

The federal government

introduced tight-money

financial policy in order to

control the growth of

credit.

The stock mkt. Reached

an alltime high on 9-3-29

Many banks failed and

closed their doors.

Personal and business

savings vanished.

Increased poverty led

to health and social

problems.

The global economy

suffered.

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Credits:

Instructor’s Resources to accompany

America Past and Present, Advanced

Placement Edition, by Michael Barbour,

Anthony Jones, and Gordon Utz.

The American Pageant, 12th ed. By David

Kennedy, Lizabeth Cohen, & Thos. A.

Bailey.

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